The Bangalore Bench of the Income Tax Appellate Tribunal allows Instakart's claims on business losses and ESOP expenses, rejecting the Revenue's disallowances.
In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench 'A', delivered a verdict favoring Instakart Services Pvt. Ltd. in a series of appeals against the Assistant Commissioner of Income Tax, Bengaluru. The tribunal allowed the claims on business losses and ESOP (Employee Stock Option Plan) expenses, effectively overturning the disallowances made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)].
The case involved several appeals concerning the assessment years 2016-17 to 2018-19, where the primary issues were the disallowance of substantial business losses and ESOP expenses. Instakart, a logistics company under the Flipkart group, had declared a significant business loss in its initial years due to competitive pricing strategies and high operational costs. The AO had disallowed these losses, questioning the profit motive and alleging preferential pricing for its group company, Flipkart.
However, the tribunal found merit in Instakart's arguments, acknowledging the competitive and nascent stage of the e-commerce logistics industry during the relevant period. It noted that new entrants often incur heavy initial losses due to necessary investments in infrastructure and pricing strategies aimed at capturing market share. The tribunal emphasized that the losses were genuine business losses, duly recorded in audited accounts, and not indicative of tax avoidance.
Additionally, the tribunal addressed the disallowance of ESOP expenses, which the AO had treated as notional. The tribunal referred to judicial precedents, including decisions in the cases of Biocon Ltd. and Novo Nordisk India Pvt. Ltd., to uphold that ESOP expenses constitute employee compensation and are deductible under Section 37(1) of the Income Tax Act.
Further, the tribunal dismissed concerns about non-deduction of tax at source on ESOP cross-charge payments to the parent company, Flipkart Private Limited, Singapore. It held that these payments were in the nature of reimbursements and did not attract tax withholding obligations.
The tribunal's decision is a relief for Instakart, allowing them to claim the contested business losses and ESOP expenses, and setting aside the Revenue's disallowances. This ruling also underscores the importance of considering the commercial realities and strategic business decisions of companies operating in highly competitive sectors.
Bottom Line:
Taxation - Disallowance of business losses on the grounds of pricing practices and alleged lack of profit motive overturned due to sufficient evidence of genuineness, commercial necessity, and competitive market conditions. ESOP cross-charge expenses allowed as deductible under Section 37(1) of the Income Tax Act.
Statutory provision(s): Income Tax Act, 1961 Sections 28, 37(1), 40(a)(i), 145(3), 195
